Buildings often have issues that arise once the building is completed. These issues are commonly identified as “defects”, and often require work to ensure that they are rectified. When approaching this common scenario, often the most cost-effective way to have the issues rectified is to have the party (the builder), fix the issues.
But what happens if the parties do not agree to that process?
Does an owner of a property who has lost confidence in their builder to rectify its defective work have to let them rectify it?
Is a builder entitled to an opportunity to undertake those works?
Need to know
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While these are often issues that arise prior to court proceedings, it is important that builders and owners are aware of the extent of the owner’s duty to mitigate their loss, in what circumstances it is appropriate for a builder to be refused reasonable access to rectify defective works and who bears the onus of proving whether the owner acted reasonably in refusing the builder the opportunity.
The Courts’ position on these issues has recently been affirmed in the decision of The Owners – Strata Plan No 89074 v Ceerose Pty Ltd & Anor [2024] NSWSC 1494 (Ceerose).
It is generally accepted that, for an owner, developer or principal to mitigate its loss arising from defective works, they must not act unreasonably in giving (or refusing) a builder a reasonable opportunity to rectify its defective works.
In circumstances of residential building work in New South Wales, section 18BA of the Home Building Act 1989 (NSW) provides that an owner is subject to a statutory duty to allow reasonable access to builders to rectify defects. This section not only codifies an owner’s general obligation to not act unreasonably, but also imposes the statutory duty on non-contracting owners of residential dwellings.
In Ceerose, the Court clarified that an owner is under an obligation not to act unreasonably and, where a builder alleges that an owner has failed to mitigate its loss by acting unreasonably, the onus will be on the builder to prove that the owner did act unreasonably. This is consistent with previous decisions of the Court in Di Blasio1 and in MD Constructions2.
The Court furthered that a plaintiff is free to act as they wish, however, the requirement of reasonableness is added to the formulation of damages to be awarded, citing Heydon JA in Sherson & Associates Pty Ltd v Bailey [2000] NSWCA 275 at [77], which relevantly reads:
“A plaintiff ‘cannot be said to have really incurred any loss which might have been avoided by his taking such steps as a reasonably prudent man in his position would have taken to avoid further loss to himself’”.
The Owners submitted that, as a matter of clarification, the defendants’ reliance on the principles in Di Blasio as a basis to assert, in essence, that a plaintiff has a general positive obligation to minimise the damages payable by a defendant, was not correct and should not be accepted. The Court confirmed that it did not take the decision in Di Blasio to have asserted that a separate duty, as alleged by the defendant, is placed on a plaintiff.
The Court did not depart from the principles in Di Blasio or in MD Constructions and otherwise agreed that, if a plaintiff (including the Owners) is under any ‘duty’ to mitigate, it is to the extent that it must not act unreasonably.
The Owners in Ceerose to successfully defend an argument from the defendants that the Owners:
- acted unreasonably; and
- were required to prove in-chief that their refusal of access to the defendants to rectify defective works was reasonable.
The Court relevantly agreed with the Owners and did not depart from the principles set out in Di Blasio and MD Constructions, as the Court found:
- it is a matter for the defendants to prove that the Owners acted unreasonably and not for the Owners to prove that it acted reasonably; and
- the proposition proffered by the defendants would, practically, require a plaintiff to bear the onus of proof of a defendant’s pleading of a failure to mitigate in defence of a claim.
The Owners obtained a judgment against the defendants in the amount of $1,952,984 (ex. GST).
Background – Ceerose
In 2010 and 2012, the builder and the developer (defendants) entered into a contract to construct a 16-storey, mixed use building that contained 19 residential apartments (Building). The Building is situated in Sydney NSW.
In 2013 the strata plan was registered and ownership of the Building was vested in the Owners. A final occupation certificate was issued in 2014.
In 2016, the Owners commenced proceedings against the defendants, seeking to recover loss and damage arising from the defendants’ defective works.
In October 2018, whilst the proceedings were on-foot, the parties engaged in settlement negotiations including the terms of a draft deed, where the defendants would agree to carry out certain works. In November 2019, the Owners declined to allow the defendants access to carry out rectification works – at that time, the deed had not been finalised and the defendants had not completed other rectification works that the Owners considered urgent. The Owners cited a loss of confidence in the defendants’ ability to carry out rectification works.
The defendants contended that the Owners would have avoided any loss if they had been reasonable and allowed the defendants to rectify the defective works. The defendants’ contention omitted the delay between the commencement of the negotiations and the Owners’ refusal of access.
The Court ordered that the matter was to be determined by a referee, who would then prepare a report on their findings. The referee found that the Owners had not acted unreasonably, and that the onus on proving the unreasonableness of the Owners was, and remained, the onus of the party making the allegation, being the defendants.
Ultimately, the referee and, in adopting the referee’s report, the Court did not agree with the defendants.
The Court awarded judgment for the owners in the amount of $1,952,984 (ex. GST) and ordered the defendants to pay the Owner’s costs of the motions heard by the Court.
Takeaways – considerations to be made in building disputes
In dealing with the question of whether an owner/developer/principal has acted unreasonably in mitigating its loss, the Court will consider the following:
- An allegation that a plaintiff has acted unreasonably is a defence made by a defendant and so the evidentiary onus is on the defendant to prove that a plaintiff has acted unreasonably – not for the plaintiff to prove that it has acted reasonably; and
- once a defendant contends that a plaintiff has failed to mitigate its loss, the plaintiff is entitled to have that question tested in court and the mere fact that the question is tested is not itself evidence that the plaintiff has failed to act reasonably3.
It is only when the question of whether a plaintiff has acted unreasonably is raised by the defendant that a plaintiff may be required to demonstrate the reasonableness of its actions in response to the defendant’s contentions. In considering the reasonableness of a plaintiff’s actions, the Court will have regard to:
- the extent and seriousness of the defects;
- whether or not the builder is appropriately licenced, qualified and insured;
- the quality of any repairs effected by the builder;
- the practicality of continuing to negotiate with the builder; and
- the builder’s engagement with the owner in respect of the defects and proposed method of rectification, in short, has the builder responded in a timely manner, taken the complaints seriously and acted fairly in the circumstances?
If you are a builder, this decision reinforces the importance of being proactive to ensure that any defective work is rectified in accordance with your contract or that reasonable attempts are made to do so (and keep records of those attempts!). The simple fact that an owner/developer/principal has denied you access will be insufficient to demonstrate to a court of tribunal that an owner/developer/principal has acted unreasonably or failed to mitigate its loss.
If you are an owner, this decision affirms your obligation to not act unreasonably when engaging with builders in relation to defective works. Although the onus will be on a builder to prove that you have acted unreasonably, it is prudent to ensure that, if you have refused a builder access to rectify defects, that such refusal is justified, and records are kept to support your position.
Need assistance?
If you find yourself dealing with defects, whether as a builder or owner, and require assistance on managing this issue and any claims that arise from the defects, then get in contact with Hamish Geddes for bespoke advice and assistance.
1Owners SP 76674 v Di Blasio Constructions Pty Ltd [2014] NSWSC 1067
2Owners Strata Plan 78465 v M D Constructions Pty Ltd [2016] NSWSC 162
3Di Blasio at [47].
